(de-news.net) – Germany’s Cabinet is set to approve a 10 billion euro income tax reform. It is focused on easing the burden on low- and middle-income households and families. Coalition tensions persist over bracket creep and taxation of top earners.
This Wednesday, Germany’s Cabinet is scheduled to approve a proposed income tax reform that would provide roughly 10 billion euros in tax relief, according to a draft prepared by Finance Minister Lars Klingbeil (SPD). The package is designed to direct most of that relief toward taxpayers with low and middle incomes and families with children, making household tax burdens a central focus of the measure. To help finance the reductions, the government plans to increase taxation on extremely high incomes.
The proposal has nevertheless exposed differences within the governing coalition over the scope and direction of tax policy. Economy Minister Katherina Reiche (CDU) has criticized the plan and called for additional measures to address so-called bracket creep. The issue arises when inflation pushes nominal incomes higher while purchasing power does not increase correspondingly, potentially moving taxpayers into higher tax brackets. Without further adjustments, Reiche’s ministry argued, the resulting effect would amount to a hidden tax increase because taxpayers could retain less purchasing power despite having gained no comparable increase in real income. Steffen, Reiche’s state secretary, conveyed her position to the Finance Ministry.
Klingbeil rejected the criticism and defended the priorities established in the draft. Speaking on the sidelines of the G20 finance ministers’ meeting in Asheville, he said the reform had deliberately focused on easing the burden on families and households with low and moderate incomes. He also emphasized that all coalition partners had approved the draft and characterized the scale of the planned tax relief as substantial. The suggestion that the reform could itself constitute a form of hidden tax increase was rejected.
Klingbeil also argued that Reiche’s objections did not reflect the position of the CDU’s leadership. In his account, the coalition committee had already agreed that the available resources should be used primarily to reduce the tax burden on lower- and middle-income households and families rather than to provide additional relief for top earners. He maintained that Chancellor Friedrich Merz had supported that approach and was expected to uphold the position as the legislation moved to Cabinet approval. The dispute therefore centers not only on the technical treatment of inflation and tax brackets but also on how the coalition’s limited fiscal resources should be distributed.
The Economy Ministry subsequently confirmed that it had approved the income tax reform during the government’s interministerial coordination process. The ministry said the draft legislation largely reflected the decisions reached by the coalition committee on July 1, 2026. At the same time, it explained that the coordination process had also provided an opportunity to set out its broader economic policy position on taxation for the coming years. The ministry’s statement thus reaffirmed its support for the agreed framework while maintaining its wider position on future tax policy.
The reform is expected to be introduced in two stages over the next two years, with total tax relief reaching about 10 billion euros. For a middle-income family with two children, the measures could result in more than 600 euros in annual relief. The government intends to offset part of the cost through higher taxation of extremely high earners, making redistribution a key element of the package. Cabinet approval on Wednesday would mark the next step in implementing the tax changes agreed within the coalition.
